Why Interest Rates Are Rising Everywhere—Except Your Savings Account | Kanebridge News
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Why Interest Rates Are Rising Everywhere—Except Your Savings Account

Many banks continue to offer meagre yields on savings accounts, but it can pay off to shop around

Tue, Oct 4, 2022 8:44amGrey Clock 4 min

The US Federal Reserve’s campaign to fight inflation by raising interest rates seems to have reached nearly every corner of the economy except one: Americans’ savings accounts.

Mortgage rates doubled this year to nearly 7%, and it has become more expensive to get a car loan or carry a credit-card balance. Yet the interest on savings accounts barely budged. In March 2020, the average annual yield on a standard savings account was 0.1%, according to Bankrate.com. It fell to a pandemic low of 0.06% after Americans’ personal saving rate peaked, and is now up to a wan 0.14%.

US commercial banks held $16.8 trillion in deposits as of June, according to the Federal Deposit Insurance Corp. Much of that vast sum sits in individual checking and savings accounts, earning little interest and losing significant value to inflation. There are savings accounts that yield as much as 3%, for those willing to shop around.

At a hearing on Capitol Hill last month, Rep. Michael San Nicolas (D., Guam) remarked on depositors’ underwhelming returns to the leaders of the nation’s largest banks. “One of the only silver linings in a rising interest rate environment is that savers are supposed to be rewarded for their savings,” he said. “They’re supposed to see the interest that they earn on their savings accounts go up.”

In response, the bank chiefs said that they expected the interest rates on their customers’ deposits to increase in the future, based on the actions of the Fed and their competitors.

The country’s largest banks can keep payouts on savings accounts low because they seem to have plenty of deposits to cover their lending businesses for now and don’t need to attract more by raising interest rates.

Some other banks are offering some of the most generous yields in years, but those still paying out meagre interest can count on customer inertia: We fail to take advantage of better deals, because switching banks seems like a headache.

Were that dynamic to change—that is, if enough consumers took their money elsewhere in search of higher returns—banks would be compelled to raise interest rates or make fewer loans, said Philipp Schnabl, a professor of finance at New York University’s Stern School of Business.

Some banks, particularly online ones, have inched up yields in response to the Fed’s rate increases. The annual interest on an online savings account at Ally Bank rose from 0.5% in May to a chunkier 2.1% last month. As of Sept. 30, according to Bankrate, the highest-yield nationally available, FDIC-insured account was UFB Direct, which was paying out 3.01%.

Greg McBride, Bankrate’s chief financial analyst, advises shopping around. “If you’re looking in the right place, it is the best you’ve seen since 2009,” he said. “If you’re just standing pat at the same place you’ve always had your savings, it probably doesn’t look a whole lot different than 2021.” (Bankrate earns money when customers open accounts using offers on its website.)

Even high-yield savings accounts are a weak buffer from 8.3% year-over-year inflation, but their annualised returns of 2% or 3% still beat a return of 0.01%. The median balance of a transaction account, which includes checking, savings and other accounts, was $5,300 in 2019, according to the Federal Reserve, the latest data available. Receiving 3% interest on that balance, versus 0.01%, would work out to a difference of about $160 a year—not an enormous amount of money, but also not bad compensation for opening a new account, which can typically take about 15 minutes of work.

People with much larger balances stand to gain more, yet those depositors don’t always bother to move their money. Tony Chan, a financial adviser in Orange, Calif., said he recently met with a new client who had about $1.2 million in an account earning 0.01% a year, or roughly $120. Mr. Chan said the money was previously invested in the stock market, but the client sold his holdings last year out of fear and has been too busy to find a good place to put it.

Mr. Chan recommended the client move most of the money into a higher-yield account and the rest into certificates of deposit. He estimates that these switches would yield at least $36,000 in interest annually.

Depositors’ inertia can be strong, to their detriment. In a study published in 2021, researchers analysed the behaviour of customers at five U.K. banks. The average customer stood to gain £123 a year, or about $190 at the time, from moving their money to a higher-yield account, yet the researchers found that switching is “rare” and that even customers with relatively large balances were no more likely to do so.

In a follow-up survey, 66% of respondents said that switching accounts would be worthwhile for them if they gained at least £100 in annual interest. But in one subset the researchers studied, despite the fact that 26% of customers could have gained at least that much by switching, only 3.5% actually switched.

“The biggest reason consumers don’t seem to reoptimise their finances seems to be a belief that it will be a huge hassle,” said Christopher Palmer, a professor of finance at MIT’s Sloan School of Management and a co-author of the study. The study also found that customers tend to overestimate how much of a hassle it actually is, and underestimate how much their interest rate might increase.

Financial advisers consider it prudent for people to cart their money elsewhere if they can find a better offer. Savers can also consider safe high-yield alternatives to bank accounts, such as government I Bonds.

Mr. Chan advises clients to keep about one month’s worth of expenses in a checking account and to seek out a high-yield savings account for cash that they want access to in the next couple of years but don’t need to draw on imminently.


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Capri Coffer socks away $600 a month to help fund her travels. The Atlanta health-insurance account executive and her husband couldn’t justify a family vacation to the Dominican Republic this summer, though, given what she calls “astronomical” plane ticket prices of $800 each.

The price was too high for younger family members, even with Coffer defraying some of the costs.

Instead, the family of six will pile into a rented minivan come August and drive to Hilton Head Island, S.C., where Coffer booked a beach house for $650 a night. Her budget excluding food for the two-night trip is about $1,600, compared with the $6,000 price she was quoted for a three-night trip to Punta Cana.

“That way, everyone can still be together and we can still have that family time,” she says.

With hotel prices and airfares stubbornly high as the 2023 travel rush continues—and overall inflation squeezing household budgets—this summer is shaping up as the season of travel trade-offs for many of us.

Average daily hotel rates in the top 25 U.S. markets topped $180 year-to-date through April, increasing 9.9% from a year ago and 15.6% from 2019, according to hospitality-data firm STR.

Online travel sites report more steep increases for summer ticket prices, with Kayak pegging the increase at 35% based on traveler searches. (Perhaps there is no more solid evidence of higher ticket prices than airline executives’ repeated gushing about strong demand, which gives them pricing power.)

The high prices and economic concerns don’t mean we’ll all be bunking in hostels and flying Spirit Airlines with no luggage. Travellers who aren’t going all-out are compromising in a variety of ways to keep the summer vacation tradition alive, travel agents and analysts say.

“They’re still out there and traveling despite some pretty real economic headwinds,” says Mike Daher, Deloitte’s U.S. transportation, hospitality and services leader. “They’re just being more creative in how they spend their limited dollars.”

For some, that means a cheaper hotel. Hotels.com says global search interest in three-star hotels is up more than 20% globally. Booking app HotelTonight says nearly one in three bookings in the first quarter were for “basic” hotels, compared with 27% in the same period in 2019.

For other travellers, the trade-offs include a shorter trip, a different destination, passing on premium seat upgrades on full-service airlines or switching to no-frills airlines. Budget-airline executives have said on earnings calls that they see evidence of travellers trading down.

Deloitte’s 2023 summer travel survey, released Tuesday, found that average spending on “marquee” trips this year is expected to decline to $2,930 from $3,320 a year ago. Tighter budgets are a factor, he says.

Too much demand

Wendy Marley is no economics teacher, but says she’s spent a lot of time this year refreshing clients on the basics of supply and demand.

The AAA travel adviser, who works in the Boston area, says the lesson comes up every time a traveler with a set budget requests help planning a dreamy summer vacation in Europe.

“They’re just having complete sticker shock,” she says.

Marley has become a pro at Plan B destinations for this summer.

For one client celebrating a 25th wedding anniversary with a budget of $10,000 to $12,000 for a five-star June trip, she switched their attention from the pricey French Riviera or Amalfi Coast to a luxury resort on the Caribbean island of St. Barts.

To Yellowstone fans dismayed at ticket prices into Jackson, Wyo., and three-star lodges going for six-star prices, she recommends other national parks within driving distance of Massachusetts, including Acadia National Park in Maine.

For clients who love the all-inclusive nature of cruising but don’t want to shell out for plane tickets to Florida, she’s been booking cruises out of New York and New Jersey.

Not all of Marley’s clients are tweaking their plans this summer.

Michael McParland, a 78-year-old consultant in Needham, Mass., and his wife are treating their family to a luxury three-week Ireland getaway. They are flying business class on Aer Lingus and touring with Adventures by Disney. They initially booked the trip for 2020, so nothing was going to stand in the way this year.

McParland is most excited to take his teen grandsons up the mountain in Northern Ireland where his father tended sheep.

“We decided a number of years ago to give our grandsons memories,” he says. “Money is money. They don’t remember you for that.”

Fare first, then destination

Chima Enwere, a 28-year old piano teacher in Fayetteville, N.C., is also headed to the U.K., but not by design.

Enwere, who fell in love with Europe on trips the past few years, let airline ticket prices dictate his destination this summer to save money.

He was having a hard time finding reasonable flights out of Raleigh-Durham, N.C., so he asked for ideas in a Facebook travel group. One traveler found a round-trip flight on Delta to Scotland for $900 in late July with reasonable connections.

He was budgeting $1,500 for the entire trip—he stays in hostels to save money—but says he will have to spend more given the pricier-than-expected plane ticket.

“I saw that it was less than four digits and I just immediately booked it without even asking questions,” he says.

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